The forced sale of life insurance plans has been criticized by FM Nirmala Sitharaman and IRDAI chairman Debasish Panda. This has brought attention back to the problem of misselling, which has left many policyholders with their money trapped in low-return, illiquid products.
These pervasive practices have come back into the spotlight when Finance Minister Nirmala Sitharaman and Chairman of the Insurance Regulatory and Development Authority of India (IRDAI), Debasish Panda, recently voiced concerns regarding banks’ misrepresentations of insurance products.
The Economic Survey 2024 also highlighted the threat of misselling in July. “Product mis-selling is too widespread to be written off as an anomaly of a few overzealous salespeople,” the study, written by Chief Economic Advisor V Anantha Nageswaran, had stated.
Hopes for a tangible campaign against mis-selling have increased as a result of top government officials and IRDAI expressing their concerns about the practice. But it remains to be seen if a long-lasting and successful solution will be found. Individual investors might use caution while following the guidance of bank representatives and other middlemen.
The following are the most typical sales presentations for insurance that you should avoid:
“This item is comparable to a mutual fund”
A number of life insurance companies have introduced “new fund offers (NFO)” for small-cap and mid-cap fund options linked to their unit-linked insurance policies (Ulip) throughout the past 18 months. However, the word “insurance” was noticeably missing from a number of adverts, which allowed laypeople to mistake these products for mutual funds.
Such sales pitches from local neighborhood agents or bank relationship managers are simple to fall for if you don’t do your research and believe what they say. In June, IRDAI issued a directive prohibiting insurers from mentioning the embedded life cover feature in their ads. In spite of this, you should use caution when assessing any investment choice that intermediaries suggest.
Determining if the product is a Ulip or a mutual fund is not difficult. You must verify the name of the organization in whose name you are sending the check or approving the auto-debit when making an investment. If you’re interested in investing in mutual funds, make sure the organization’s name is either “mutual fund” or “asset management company” rather than “life insurance company.”
In addition to this, mutual funds do not have a five-year lock-in period like Ulips have. The lock-in period for equity-linked savings plans (ELSS mutual funds) is three years.
“An endowment policy provides tax advantages together with safe returns similar to FDs”
It is simple for risk-averse investors to succumb to the allure of certain profits. Many people are persuaded of the worth of such policies in their portfolios when they consider the possibility that these profits may be tax-free. Senior adults are frequently the targets of these bank sales pitches, only to discover when it’s time for renewal that the product entails a commitment to recurrent premium payments for at least five to ten years. Additionally, because they have no dependents, older people wind up paying superfluous mortality charges for life insurance.
Ask them to provide IRR (internal rate of return) figures rather than allowing them or other middlemen to discuss the absolute payouts to which you will be entitled under the policy. In the long run, assured traditional policies yield returns ranging from 4 to 7 percent. Even while surrender value rules are currently more policyholder-friendly than they were in the past, there is a cost associated with leaving the insurance early if you later decide it is not suitable: you will lose some of your premiums.
In actuality, insurance is for protection rather than income or return. Furthermore, such policies have a far lower level of protection. Instead, consider purchasing sufficient term insurance coverage, which comes with reasonably priced premiums.
“A life insurance policy provides three benefits: investments, tax savings, and life coverage”
Salaried workers who are eager to make tax-saving investments during the tax planning months of January, February, and March continue to find attraction in the oldest and most popular sales pitch.
Many people purchase life insurance policies they may not need in order to save money on taxes under section 80C, which allows tax deductions of up to Rs 1.5 lakh on specific instruments, including life insurance premiums.
Since the Rs 1.5 lakh limit would be covered by other 80C components like Employees’ Provident Fund (EPF) contributions and children’s tuition fees paid during the year, it is likely that many would not need to make any tax-saving investments.
Tax planning should not be viewed as a stand-alone activity. It ought to be included in the comprehensive financial plan you create at the start of the year. Invest throughout the year and each month rather than finishing the assignment near the end of the year.
“Purchase a guaranteed policy to protect yourself from the risks of market volatility”
Because of the assured maturity proceeds they promise, life insurance companies are putting more of an emphasis on non-linked, non-participating, guaranteed endowment policies.
Ulips, on the other hand, have market-linked returns. Furthermore, although participating endowment policies also provide safe returns, they lack a set maturity amount because the final corpus is dependent on terminal and yearly bonuses that are announced during the tenure.
Even such guaranteed payouts may reassure policyholders with lesser risk tolerance, the reality is that, even if they remain invested throughout time, they will only generate 4–7% annualized returns.
Since life insurance policy maturity proceeds are tax-free, these products may only be of interest to high net worth individuals (HNI) who are unlikely to require the funds in the interim and are searching for assured-return instruments that provide tax benefits.